RBA must explain itself

The RBA should be required to explain its decisions.  This would make mistakes in monetary policy less likely and less persistent.

When the Governor of the RBA makes a mistake, there is currently no effective process for identifying this or correcting it.

The RBA Board is meant to provide oversight. But the Board is mainly composed of business leaders who lack expertise in monetary policy. It is unable to effectively challenge the Governor.

The RBA’s unchecked discretion has resulted in inflation that is too low and unemployment that is too high.  The persistent failure of the Bank to meet its statutory targets establishes a presumption that reform is needed.

Proper reasons for decisions would involve addressing counter-arguments and relevant research, which the Bank does not currently do.

For example, Why does the Bank disagree with the research that concludes that interest rates are a bad instrument for ensuring financial stability?  Why does it disagree with the research that concludes negative interest rates would be beneficial? Why not buy more bonds (“quantitative easing”), given that this would raise inflation and lower unemployment?  And so on.

Explaining decisions would make it easier for mistakes to be identified and corrected.  It is also necessary for accountability and democracy. The public needs to have confidence that decisions are well-based, reflect society’s values and do not unduly benefit favoured groups.

Increased transparency is against the Bank’s private interest: it would be bad publicity and make criticism easier. But it is in the public interest. So it should be required.

This is an edited extract of an article published in Pearls and Irritations as The Reserve Bank needs accountability that only external scrutiny can provide.